Mad Catz is Back!! The MCZAF Stock is Not - Part 1

Back in January, I was watching a ReviewTechUSA's video on YouTube and the focal point of the video was about the company Mad Catz Interactive. If you’re in the gaming scene whether via PC or console, you most likely know what the brand is. For those who aren't familiar, Mad Catz is a brand known for making game peripherals for nearly the past three decades. In recent years, the company has encountered critical and financial trouble which led to their demise almost a year ago. Back in late December/early January, the Mad Catz brand was revived under the company Mad Catz Global Limited and announced a few cool gadgets coming down the pike at CES 2018. I was very impressed of the products that will be debuting later this year that was shown in their 14-minute CES video. What is more impressive was discovery that there is stock under the Mad Catz banner that is currently being traded for a penny a share.

I got super excited and started daydreaming of the idea that I can make a killing if I get in and buy as much as I can before their products are released. I went on a particular trading platform and was able to buy up a significant amount of shares. I just kept thinking to myself, "this is it...this is the opportunity that I have been waiting for. This is what the American dream is about. All I have to do is wait until it gets several cents or higher and I can pay off my student loans, credit card, buy a house, have money for my two sons, so forth and so forth."

As days went on, I started to come off those daydreaming highs and came back to reality. I started to become more grounded again and then, I found myself searching different forums, financial news outlets, and other sources to validate if I made a good decision. And much to my surprise, after the research I conducted, I realized that I got myself into an "Oh Shit" moment. If you are like me and you were/are thinking about buying the MCZAF stock that is so appealing, I am here to warn you that you shouldn’t. Don't make a dumb decision like me. Here is what I have found.

Now before I go on explaining all of this, of course, here is a disclaimer: I am not a financial/trading/securities advisor, lawyer or professional. I am just an average Joe. I am not trying to deter anyone from missing an opportunity. I sat down for hours researching and everything that I reference and the viewpoints on this subject are strictly based off my own rationale. If I have misunderstood anything or if something I have stated is completely wrong, please feel free to correct me. I love constructive criticism and the internet is a place for thoughts and ideas to come together from many perspectives as long as it's constructive and not harmful. Please make sure to do your own due diligence to make an informed decision that suits you. I am not offering any professional advice, just my opinions and ideas.

With that out of the way, let's begin.

One of the forums that I participate in is Investorshub. Regardless of what anyone thinks of it, I like to read and part-take in many of the online forums because there's always a chance that you might come across something that is meaningful. For example, I came across a reddit post and the individual stated that the Mad Catz Global limited is a privately owned company in the Hong Kong Business Directory. I copied the link and stated in both Yahoo Finance Conversations and InvestorHub that Mad Catz Global is not publicly traded. Some of the folks responded with statements, inquiries, and concerns to the newly found information. As I started to write about my discoveries as a quick post, I soon realized that what I was writing was starting to turn into an article. Hence, what you are seeing now. This is written in a way to address the responses that came from that forum and I organized them as key concerns. Here it is as follows:

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Key Concern #1: Insolvencies and Bankruptcies in the US and Canada

According to this press release by Globe News Wire, Mad Catz Interactive, Inc. (OTC: MCZAF), which is essentially the parent company that was incorporated in 1993, made a voluntary assignment under the Bankruptcy and Insolvency Act (BIA) in Canada and its wholly-owned subsidiary, Mad Catz, Inc. (U.S. based) filed for Chapter 7 Bankruptcy. To understand this, we first have to understand some of the basic principles behind bankruptcy, insolvency as well as how each country handles them and in what regard. Stating the obvious here: there are a lot of similarities between the US and Canada in many ways. That includes businesses, finance and how the law interacts with them. When dealing with bankruptcy in both countries, in short, Chapter 11 is somewhat comparable to the Companies' Creditors Arrangement Act (some measure of restructuring/reorganizing) and Chapter 7 is kind-of comparable to the Bankruptcy and Insolvency Act (generally liquidation) in the US and Canada respectively. Please note that I said "somewhat" and 'kind of" comparable, meaning similar in certain context but clearly not the exact same.

When an entity is insolvent, generally that entity is having trouble meeting its financial obligations such as paying bills, or debts of the creditors in a specified time frame. There are a multitude of assorted methods and/or laws that can help a business with resolving their financial woes. For example, they can seek a financial or business consultant advisor to look at the current revenue model and possibly make changes there. In other cases, the entity can use the law within that country to further aid them in hopes of getting out of the distress state the entity is currently in. If the entity can't get their affairs back in order and if the debt proves to be too much to repay, one of the legal options that can be taken is bankruptcy. Bankruptcy is the action that the entity can or must file to the legal system to seek relief. In the US, there are several categories a.k.a chapters that the entity can file under and the government will ultimately decide on what should and will be done on that entity's behalf.

When a company files for Chapter 7 in the US, the usual outcome is that the company's estate will be appointed a trustee and operations of that will come to a halt unless the trustee decides to continue that particular business' operations. Whatever third-party is appointed as the trustee, they will analyze the business' estate/assets and decide on the best course of action to pay off the creditors, organizations and/or governments. Now I stated earlier that the BIA is "kind of" comparable to Chapter 7. That statement is subject to dialetheism; meaning that it's similar to Chapter 7 is true and false at the same. It really depends on the situation. The BIA is a little more "open ended" in the sense of dealing with legal actions that the entity can take when dealing with insolvency and bankruptcy in Canada.

Since I am not a lawyer, again, this is all based off my interpretation and I can only provide a short explanation based off that interpretation. Again, as previous mentioned, the Companies' Creditors Arrangement Act (CCAA) is sort of like Chapter 11 here in the States in regards to the business seeking government approval for it to restructure and reorganize in hopes of resolving debt and getting back on track. Well, the BIA contains some legislature that can allow for possible restructuring in a similar manner. However, if the company chooses the go down the direction of the insolvency portions of the BIA, the company is placed on a tighter leash with the Canadian government. This can include time allowed for a proposal plan to be filed, court monitoring, and other things.

The way to look at it from a US perspective is that the BIA acts as a hybrid between Chapter 11 and Chapter 7. Bankruptcy under the BIA will kick in immediately due to several outcomes or choices but two in particular are: The creditors decide to reject the proposal plan revolving around settling the debts owed OR if the company "voluntarily" assigns in bankruptcy. Mad Catz Interactive did the latter. When this happens, a trustee is appointed to the company and according to this Association of Corporate Counsel article, "The Trustee's principal mandate is to liquidate the property of the estate and distribute the proceeds thereof to the creditors of the estate in accordance with the prescribed statutory scheme of distribution as set out in the BIA" in Canada.

Thus, this is where both the BIA and Chapter 7 are aligned in regards to how bankruptcy and the company's assets were handled, especially in Mad Catz Interactive's case. Mad Catz Interactive/Mad Catz, Inc. "voluntarily" filed for both of these in their respective country back in March of 2017. PricewaterhouseCoopers (PwC) was appointed as the Trustee. For those (including myself) holding that MCZAF shares, it's most likely worthless because as it was alluded to in the Globe News Wire article, liquidation was presented as the only course of action taken by PwC for the parent companies and its subsidiaries in their respective countries.

Key Concern #2: SEC dealings with publicly traded companies and Chapter 7 Bankruptcy in the US

A following response could be: "That still doesn't prove that the stock is most likely worthless. I held the stock for several years and I have been notified about my stocks if the company is no longer active."

Not necessarily...

According the this SEC article, "Stockholders DO NOT HAVE to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims." The key term is that last sentence is "unlikely." Thus leading to the following statement in the article that states: "Usually, the stock of a Chapter 7 company is worthless and you have lost the money you invested." There it is. I mean that's as straight forward as it's going to be. There is no LEGAL requirement.

Key Concern #3: FINRA, SEC and the OTC Markets

A following response to that could be: "Well, Mad Catz was/is traded on the OTC Markets and the OTC is not overseen by the SEC. The OTC is regulated by the Financial Industry Regulatory Authority (FINRA)."

We need to first examine the relationship and rules between FINRA, SEC and the OTC Markets to understand who and what is conclusively controlled. If you haven't figured it out by now, the U.S. Securities and Exchange Commission (SEC) is a government agency that is mainly responsible for regulating and enforcing laws, rules and guidelines for finance securities revolving around investments, electronic stock and option exchange markets and other tasks. Basically, when a company is being publicly traded on a particular market/exchange, that company has to abide by the regulations that are set by certain organizations as well as the government such as disclosing and reporting financial and other important information to the investors. But again and again, only certain rules are enforced by these various parties, depending on which appropriate market and/or the exchange that the company wants to be traded under.

Hence, bringing forth the idea that we need to make a distinction between what markets and exchanges are. The term "market" and "exchange" are generally used interchangeably but from a definition standpoint, they are different. The word "market" is a generic, blanket term used to describe a system or infrastructure to exchange goods, services, commodities, money, etc. An exchange, is a special type of market that is coordinated and monitored by a group, organization or some form of govern party to perform the same exchanges of goods, services or what have you. In terms of dealing with securities in the US, stocks can be traded via major exchanges such as the NASDAQ/NYSE or through a market like the OTC (where trading takes place off an exchange through a broker-dealer) or some other alternative trading system (ATS).

Probably not the best analogy but the way I think of it is that the market is comparable to selling something on Craigslist whereas the exchange is comparable to selling something on Ebay. Both are markets but if we were to draw comparisons of the two in terms of the offerings provided by each marketplace, a person can argue that one marketplace has several clear advantages over the other. Craigslist doesn’t have fees for listing and completing sales, in addition, it generally doesn't involve shipping items (another expense). Plus, there is potential traceability and reporting to the IRS if you generate a certain amount of sales through Craigslist like Ebay. On the flip side, Ebay provides more of an awareness of buying, selling, listing, and fund-handling, etc. than Craigslist. Ebay also utilizes PayPal that protects the consumers from potential fraud and disputes. Not saying that markets can't be as organized and monitored like an exchange but exchanges typically have more governance in place to help minimize the risk levels of investing and trading. Therefore, companies on an exchange have to comply with the regulations of the SEC and other self-regulatory organizations (SRO) under more stringent rules. The tradeoff is that the company's value is considered to be more reputable and its stock is generally more liquid which entices more faith and data-risk assessment for investors to place their money into. For companies that possibly can't meet these guidelines set by both the SEC and the exchange, also possibly being a foreign-based company (other requirements are placed on non-US based entities) have the option to go to an ATS, such as the OTC market to offer trading for their company's equity.

FINRA is a private, non-profit SRO that mainly oversees, regulates and carries out other tasks over certain exchanges (i.e. NYSE) and markets. One of their main responsibilities includes overseeing broker-dealers that operate on the OTC market as well. Even though FINRA is not technically the SEC or any part of the US government, both the SEC and Congress backs them up in a supportive matter. This allows FINRA some level of "power by proxy" so don't take them lightly. Ultimately, FINRA works alongside with the SEC and acts as a regulator in a de facto matter for most markets and exchanges, they cannot juxtapose any US-based legal ramifications towards a business or company. Instead, they will inform and bring in the SEC/government, who is the true regulator and enforcer of securities trading.

Brokerage firms, dealers, exchanges, markets, etc. are registered through FINRA via membership. The overall OTC market in the US is broken down into two major houses: the OTCBB, a market which is operated by FINRA and the OTC Link LLC, which is owned by the OTC Market Groups, Inc. that offer three different markets. In total, there are four total OTC markets which FINRA runs one and OTC Link runs the others. Here is where the confusion lies and hopefully, I am able to clear this up:

• The OTC Link LLC is the wholly owned subsidiary of the OTC Markets Group...just like Mad Catz, Inc. to Mad Catz Interactive. To sum up what the OTC Link is, OTC Link owns and operates an electronic inter-dealer quotation system that displays quotes from broker-dealers for many over-the-counter (OTC) securities known as OTC Link ATS. Also stated is that *"market makers and other broker-dealers who buy and sell OTC securities can use OTC Link to publish their bid and ask quotation prices." *
• The three markets that are offered by OTC Link are OTCQX, OTCQB and OTC Pink. In order for a company to be publicly traded through any one of these markets, they need at least one broker-dealer to quote their securities using the OTS Link ATS. If a company wanted to list their own stock, they would have to go to an Exchange to do so.
• The SEC mandates that all entities who are broker-dealers must be registered with them as well as a self-regulatory organization (such as FINRA) to participate with executing transactions on behalf of an investor as well as acting as a dealer that buys and sells securities for the entity's account. An ATS also has to be registered and approved by the SEC as well. Since FINRA is responsible for overseeing the OTC markets, it is required that every broker-dealer is registered with them. (REF: http://www.otcmarkets.com/learn/otc-trading)
• OTC Link LLC as the company is registered with the SEC and is a member of FINRA as a broker-dealer. The company can part-take in selling/buying equity stocks for their account. OTC Link LLC offers the OTC Link ATS that allows other broker-dealers who are registered with FINRA and the SEC to engage in the market. The companies that are listed on any one of the three OTC Link Markets...is not required to be registered with the SEC and FINRA. The company is only required to follow the rules and guidelines of the particular market it is listed on.
• Out of the three OTC Link markets, Pink is least restrictive. It has little to no qualifications, notifications and disclosures. Thus lies the problem. Broker-dealers that interact with Mad Catz stock are required to report their own dealings to FINRA, SEC and the OTC Link LLC but Mad Catz as a company has little to none requirements to report to FINRA, SEC, the OTC Link and the investor.

Key Concern #4: Type, Class of Stock and Shareholder Rights

Let's take something else into an account - the class and the type of the stock/share itself. Obviously, without working with the company directly and not being purveyed into the financial records, I am left to speculate. Throughout many of the forums, people have stated that they have a large amount of shares of the company on the some of the forums and assumed that they are entitled to notifications and voting people. What I would say to that is "maybe." Once again, it's a case-by-case in reality.

A share is used as a unit to measure the stock or ownership of a company. The stock can come in different forms but for the average person, the type of stock that he or she thinks of is usually what's known as common stock on the stock markets. Conceptually, one of the benefits of owning common stocks is that you can have voting rights in the dealings and decisions of the company. Nonetheless, like anything in life, it's just not as simple as it sounds. The problem lies in several key factors such as:

1. The different types of stocks such as common stocks, restricted stocks, preferred stocks, etc.
2. Those different types of stocks can have different type of classes, meaning that a certain class of stock can potentially have more voting power than another class.
3. Depending on the laws and guidelines of where that company was formed, in addition to whether the company actually outlines what rights shareholders are entitled to, this can lead to many companies having different types of stocks with no actual voting power.

So let's put this into perspective. Let's assume that as it stands right now (not familiar with any of Mad Catz's historical business data), there are 73.47M shares outstanding and there 73.06M in public float for MCZAF. Basically all but 410,000 are freely out on the market for trading. Those 400K+ stock are considered "restricted stock" and the 73M+ is common stock. Using the Wikipedia's definition, restricted stock are:

"stock of a company that is not fully transferable (from the stock-issuing company to the person receiving the stock award) until certain conditions (restrictions) have been met. Upon satisfaction of those conditions, the stock is no longer restricted, and becomes transferable to the person holding the award. Restricted stock is often used as a form of employee compensation, in which case it typically becomes transferrable ("vests") upon the satisfaction of certain conditions, such as continued employment for a period of time or the achievement of particular product-development milestones, earnings per share goals or other financial targets."

Restricted stock can have voting power if the company deems it and once the conditions are met, they can be transferred and treated as common stock. That new common stock can enter the market, thus reducing the difference between the shares outstanding and increasing the public float. Now, there are almost an infinite amount of other possible factors that can happen such as splitting stock, issuing new stock to increase the amount of total shares, blah blah blah; but as I stated, I don't have access to any of the historical business & financial information. In these certain conditions that I have laid out, I think that the owners, creditors, and board of directors of Mad Catz have both restricted, stock that was converted from restricted to common and common stocks that had a higher class level with more voting power than the rest of the public as well as owning the majority of the stock that already existed in float. This could be another reason why the public was not sent a notification asking them to chime in on the affairs.

This is just the tip of the iceberg. I have yet to go over my crazy theories and other facts that I have found. However, this is a good stopping point to conclude Part 1. Originally, this was supposed to be a forum post but as I kept digging, it morphed into a 5000+ word article. Hence the reason why I am splitting this up. There is a lot more to discuss, and hopefully, I am able to will bring all of this together in the following article . Thank you all for taking the time to read this and I will see you in Part 2!!!